RRSP LOAN PROGRAM TO HELP WITH DOWN PAYMENT

by Tish Schobourgh

RRSP LOAN PROGRAM TO HELP WITH DOWN PAYMENT

What is an RRSP Loan?

An RRSP loan is a financial product that allows you to borrow money specifically to make contributions to your Registered Retirement Savings Plan (RRSP). Since it’s a loan, you'll be responsible for paying interest to the lending institution, whether it's a bank, credit union, or investment firm.

One of the benefits of contributing to an RRSP is that it can lower your taxable income, which means using an RRSP loan might reduce your overall income tax burden and could even result in a tax refund.

Types of RRSP Loans

Financial institutions typically offer RRSP loans with terms ranging from 1 to 10 years. These loans can be categorized as follows:

Short-Term RRSP Loans: Usually around 12 months, these loans allow you to borrow a smaller amount that you can contribute to your RRSP immediately.
Long-Term RRSP Loans: With terms extending up to 10 years, these loans generally provide a larger sum, enabling you to catch up on any missed RRSP contributions from previous years.

How to Qualify for an RRSP Loan

Eligibility criteria for RRSP loans can vary by lender, but common factors include:

Credit Score: A good credit score (typically around 660) is usually required.
Income: Lenders will want to ensure you have the means to repay the loan.
Existing Debt: Your current debt levels may impact the size of the RRSP loan you can obtain.

To apply for an RRSP loan, you can usually speak with a representative in person or over the phone. Many financial institutions and online banks also offer online application options.

Benefits of an RRSP Loan

Tax Advantages and Growth Potential: Contributions to your RRSP can provide a tax deduction while allowing your investments to grow over time.
Flexible Borrowing Limits: Many lenders offer loans up to $50,000, which you can use for current contributions or to catch up on past years.
Varied Loan Terms: Loan terms typically range from 1 to 10 years.
Deferred Repayment Options: Some loans come with a 90-day grace period before repayments begin, allowing you to wait for your tax refund.
No Prepayment Penalties: You can make extra payments at any time without incurring fees, helping you pay off the loan faster and reduce interest costs.

Drawbacks of an RRSP Loan

Limited Savings Potential: If you’re in a lower tax bracket, the tax savings from an RRSP loan may not be significant.
Investment Risk: The returns on your investments must exceed the interest on the loan for it to be beneficial.
RRSP-Only Use: Prioritizing RRSP contributions over paying off high-interest debt (like credit card balances) may not be wise.
Increased Debt Burden: An RRSP loan adds to your debt load, so consider regular RRSP contributions without taking on additional loans.

How Does an RRSP Loan Work?

Let’s explore an example of how an RRSP loan can function. Meet Caden, a 35-year-old Canadian saving for retirement:

His marginal tax rate is 40%.
He plans to contribute $4,500 to his RRSP this year.
He decides to borrow $3,000 to enhance his contribution.

Now, his total contribution amounts to $7,500 ($4,500 + $3,000). At a 40% tax rate, this could yield a $3,000 tax refund, allowing him to pay off the loan quickly with minimal interest. Additionally, a larger contribution means more compounding potential over the 30 years until he retires, leading to a potentially larger portfolio.

How Long Will It Take to Repay an RRSP Loan?

When you take out an RRSP loan, most financial institutions offer:

The ability to borrow a certain amount with flexible terms (1 to 10 years).
A 90-day grace period before repayments begin, which typically aligns with receiving your tax refund.
Options to make additional payments without penalties, allowing you to pay off the loan sooner and save on interest.

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